CONGA CORPORATION, d/b/a Conga Latin Bistro v. COMMISSIONER OF REVENUE
No. A14-1042
Supreme Court of Minnesota
Aug. 5, 2015
867 N.W.2d 41
DIETZEN, Justice.
We conclude that when an offender receives a stay of adjudication under
Dupey‘s petition for postconviction relief was therefore timely. On May 24, 2011, the district court revoked Dupey‘s stay of adjudication, sentenced him, and entered a judgment of conviction. Dupey filed his petition for postconviction relief within 2 years of May 24, 2011. Accordingly, we reverse the court of appeals and hold that the district court erred by concluding that Dupey‘s petition was time-barred.
III.
The only remaining question is whether Dupey is entitled to an evidentiary hearing on his petition for postconviction relief. The postconviction court must hold an evidentiary hearing “[u]nless the petition and the files and records of the proceeding conclusively show that the petitioner is entitled to no relief.”
The postconviction court determined that Dupey did not allege sufficient facts to entitle him to an evidentiary hearing on his petition, specifically concluding that the record showed that “the manifest injustice standard under [
Reversed and remanded.
Mark A. Pridgeon, Edina, MN, for respondent.
Lori Swanson, Attorney General, Shannon M. Harmon, Tamar N. Gronvall, Assistant Attorneys General, Saint Paul, MN, for relator.
DIETZEN, Justice.
The Commissioner of the Minnesota Department of Revenue (“Commissioner“) conducted an indirect audit of the sales
Conga operates a restaurant, nightclub, and bar on East Hennepin Avenue in Minneapolis. In June 2009, the Commissioner notified Conga that an audit would be conducted for the period of January 1, 2007, through March 31, 2010.1 The auditor met with Conga, reviewed its files and documents, and determined that Conga had no records for 2007 and that its records for the other tax periods were not reliable.
As a result, the auditor decided to use an indirect audit method to reconstruct some of Conga‘s alcohol sales, some of its revenues from cover charges, and its estimates on use tax liability based on giveaways and payments. Specifically, the auditor reconstructed Conga‘s 2008 alcohol sales using the “unit volume method” to compare Conga‘s alcohol purchases (liquor, beer, wine) to its likely alcohol sales.2 Based on this reconstruction, the auditor determined that Conga had $198,344.80 more in alcohol sales than it had reported in its Point-of-Sale (POS) system and on its sales tax returns for 2008. The auditor also determined that Conga had $45,500.04 in unreported cover charges and $1,274 in unreported service charges.3 By comparing Conga‘s unreported revenues as reconstructed to Conga‘s reported revenues for 2008, the auditor determined that Conga had underreported 33.326 percent of its total revenues for 2008. This underreporting rate was then applied to the sales and revenues reported by Conga to the Department of Revenue during calendar years 2007, 2009, and the first quarter of 2010 to calculate Conga‘s underreported revenues for the entire audit period. Based on these calculations, the Commissioner assessed Conga $160,105.37 in additional sales, use, and entertainment taxes, plus penalties and interest.4 Conga ap-
pealed the assessment to the Minnesota Tax Court pursuant to
At trial, the Commissioner presented evidence to explain the reasons for conducting an indirect audit. As explained by the Commissioner, the auditor had requested various documents from Conga, including the complete sales, purchases, and bookkeeping records for 2007, 2008, 2009, and 2010. Conga did not provide the requested records for 2007, but did provide some of the requested documents for the remainder of the audit period. Upon review of the records provided, the auditor identified discrepancies in several areas: between Conga‘s total liquor purchases as shown on supplier invoices versus its reported sales to the Department of Revenue; between Conga‘s bank deposits for 2008 versus the total revenues reported on its federal income tax return for that year; between income reported on Conga‘s income tax filings versus revenues reported on its sales and use tax filings; and between Conga‘s daily sales reports versus its monthly summaries and sales tax filings.
Based on these discrepancies, the auditor met with Conga representatives and requested additional information about the bar operations, as set forth in a detailed questionnaire. Sometime after that meeting, the auditor decided to conduct an indirect audit because Conga: (1) had been audited in the past; (2) had filed its sales and use tax returns late on five occasions; (3) had not filed returns for use tax, entertainment tax, or liquor gross receipts tax; (4) had no records for 2007; (5) had a discrepancy of $2,673 in liquor purchases; (6) had a discrepancy in its 2008 income and sales tax filings; and (7) had unexplained entries in its POS. At trial, the Commissioner presented additional reasons to support the decision to conduct an indirect audit, which are that: (8) Conga‘s owner commingled personal assets with those of the business; (9) some sales were made outside Conga‘s POS system; and (10) not all cover charges were deposited into Conga‘s corporate bank account.
The tax court turned first to the Commissioner‘s decision to conduct an indirect audit, and concluded that the Commissioner‘s authority to do so should be reviewed under the standard set forth in a provision of the Minnesota Administrative Procedure Act (MAPA),
The Commissioner now seeks review by this court pursuant to
I.
The Commissioner argues that the tax court erred as a matter of law by reviewing the decision to conduct an indirect audit under the standard of review set forth in
We review decisions from the Minnesota Tax Court to determine whether: (1) the tax court had jurisdiction; (2) the tax court‘s decision was supported by the evidence and was in conformity with the law; and (3) the tax court committed any other error of law.
A.
The Commissioner first argues that
The tax court acknowledged that its authority to review the Commissioner‘s order was governed by
To determine the scope of judicial review of the Commissioner‘s assessment order and the underlying decision to use an indirect audit to assess taxes, we must interpret the relevant provisions of
Section 14.69 sets forth the standard for judicial review conducted pursuant to
The Minnesota Tax Court is an independent agency of the executive branch.
The procedure for appeals to the tax court from any official order or assessment of the Commissioner of Revenue or any matter pertaining thereto is governed by
The Tax Court shall hear, consider, and determine without a jury every appeal de novo. A Tax Court judge may empanel an advisory jury upon the judge‘s motion. The Tax Court shall hold a public hearing in every case. All such parties shall have an opportunity to offer evidence and arguments at the hearing; provided, that the order of the commissioner or the appropriate unit of government in every case shall be prima facie valid.
Subdivision 6 clearly governs the standard of review applicable to the tax court‘s review of an order of the Commissioner. It logically follows that the same legal standard applies to the Commissioner‘s underlying decisions reflected in that order, including the decision to conduct an indirect audit. The first sentence of subdivision 6 states the tax court shall determine “every appeal de novo.” It is undisputed that the Commissioner‘s order and “any matter pertaining” to the order are appealable to the tax court. See
The tax court‘s reliance on MPIRG to support judicial review under section 14.69 is misplaced. It is true we stated in MPIRG that there “is a presumption in favor of judicial review of agency decisions in the absence of statutory language to the contrary.” 306 Minn. at 376, 237 N.W.2d at 379. But in MPIRG, the statutes were “silent on the question of required hearings or the appealability of [the] decision not to require an environmental impact statement.” Id. Section 271.06, however, is not silent. As noted above, this statute describes in several provisions the appeal procedures, including the tax court‘s scope of review. This statute also establishes the presumptive validity of the Commissioner‘s order, as do other statutory provisions relevant to the tax court‘s review. See
We conclude that
The Commissioner next argues that the tax court erred in concluding that an indirect audit may be used only when a direct audit is not possible. According to the Commissioner, she has broad discretion to conduct an indirect audit of the taxpayer‘s records whenever it is reasonable to do so.
At issue here are two types of audits: a direct audit and an indirect audit. A direct audit involves a review of the books and accounts of a taxpayer, whereas an indirect audit involves a review of the accounts available to the auditor as well as a review of information provided by the taxpayer and available from other sources. Internal Revenue Manual (I.R.M.) § 4.10.4.2.7-.8 (2011). The indirect audit here relied on a “unit volume” method to reconstruct Conga‘s sales during the audit period.7 With this method, an auditor re-
The tax court rejected the Commissioner‘s argument that she has the authority to conduct an indirect audit whenever it is reasonable to do so, concluding instead that an indirect audit is permissible only when it would be impossible to conduct a direct audit as, for example, when the taxpayer produces no books and records to audit. Conga Corp., 2014 WL 1711795, at *17. For the reasons that follow, we reject the tax court‘s narrow view of the Commissioner‘s authority to use an indirect audit to assess taxes.
In Holland v. United States, 348 U.S. 121, 131-32 (1954), the United States Supreme Court rejected the opportunity to limit the United States Commissioner of Revenue‘s use of indirect auditing methods8 to situations in which “the taxpayer has no books or where his books are inadequate.” Id. at 131-32. The Court noted that the federal government is not bound to accept a taxpayer‘s returns or records at face value, and is entitled to “look[] beyond the self-serving declarations in a taxpayer‘s books” in order to determine the correct amount of taxes to be assessed. Id. The Court concluded that to protect the revenue system, “the Government must be free to use all legal evidence available to it in determining whether the story told by the taxpayer‘s books accurately reflects his financial history.” Id. at 132.
In F-D Oil Co. v. Commissioner of Revenue, 560 N.W.2d 701, 706 (Minn. 1997), we considered an indirect audit to be an “alternative method” available to the Commissioner, but left open the question
Our decision in F-D Oil Co. confirms that the burden to maintain and provide adequate, complete, accurate, and reliable records rests on the taxpayer, which has the particular knowledge of the relevant facts and access to the records that verify those facts. This is consistent with the Legislature‘s directive that “all gross receipts are [presumed] subject to [] tax,” and the burden of proving otherwise “is on the seller.”
We conclude that when the taxpayer fails to produce adequate and complete books and records for audit, or the taxpayer‘s books and records are not accurate or reliable, the Commissioner has the statutory authority to conduct, and is justified in using, an indirect audit to assess taxes. Our conclusion rests on the premise that the taxpayer has the burden of maintaining adequate and complete records and making those records available for audit, and that when the taxpayer fails to satisfy that responsibility, the Commissioner may use an indirect audit to assess taxes. We recognize that in most cases the Commissioner should use a direct audit to assess taxes because that method relies on the taxpayer‘s existing records, which are typically the best evidence of the taxpayer‘s revenues and expenses. But when the taxpayer fails to produce adequate and complete records for audit or the Commissioner determines that the records produced for audit are not accurate or reliable, an indirect audit allows the Commissioner to determine the accuracy of a return, fix tax liability, and administer the revenue laws as part of the tax assessment process.
C.
The Commissioner next argues the tax court erred by concluding an indirect audit constitutes a “statistical or other sampling technique[]” within the meaning of
The Commissioner‘s indirect audit used the unit volume method to reconstruct 100 percent of Conga‘s sales for 2008. Specifically, the Commissioner reconstructed total sales from invoices provided by vendors who sold alcohol to the taxpayer; deducted amounts for waste, spillage, and other uses based on information provided by Conga;
The tax court concluded that an indirect audit is a “statistical or other sampling technique” within the meaning of
Section 270C.03, subdivision 1(3), states the Commissioner has the power and duty to “use statistical or other sampling techniques consistent with generally accepted auditing standards in examining returns or records and making assessments.” The phrase “statistical or other sampling technique[]” is not defined in Minn. Stat. ch. 270C (2014). But the phrase clearly contemplates a technique used in the course of a tax audit—a process in which the auditor takes a sample of information from the books and records furnished by the taxpayer to test whether the sample is statistically representative of the entire population and can be extrapolated to the entire population, subject to the inherent limitations of sampling. See, e.g., Utah v. Evans, 536 U.S. 452, 467 (2002) (describing sampling as “selecting and observing a part (sample) of the population in order to make inferences about the whole population“) (quoting L. Kish, Survey Sampling 26 (1965)). The purpose of statistical or other sampling techniques is “to provide a reasonable basis for the auditor to draw conclusions about the population from which the sample is selected.” 1 Am. Inst. of Certified Pub. Accountants, Professional Standards, AU-C § 530.04 (2014).
The IRS manual describes sampling techniques in its manual as a “valuable examination tool[] where effective use of resources makes it uneconomical to audit voluminous accounting data.” I.R.M. 4.47.3.1(2). The IRS manual further explains:
Statistical sampling should be considered whenever a group of accounting entries or transactions has sufficient adjustment potential to warrant examination, but the examination of the totality of all such transactions is prohibitive in terms of time and resources. In any audit situation where it is reasonable to examine 100 percent of the items under consideration, statistical sampling techniques should not be used.
Id. § 4.47.3.3(2).
The plain and ordinary meaning of the phrase “statistical or other sampling technique[]” in subdivision 1(3), as applied here, is a technique in which a representative sample is taken from the taxpayer‘s records and extended to determine whether the sample is statistically representative of the sales at issue, and whether that sample provides a reasonable basis for the auditor to draw conclusions about taxable revenues based upon that sampling. Thus, the technique may allow an auditor to save time and resources, particularly when complete records are unavailable or unreliable, by examining a small, statistically representative sample of the taxpayer‘s records. See, e.g., Wybierala v. Comm‘r of Revenue, 587 N.W.2d 832, 834 (Minn. 1998) (explaining that a “statistical method” had been used to “project the total ‘sales tax’ that had been collected” because “sufficient
We conclude that an indirect audit is not a “statistical or other sampling technique[]” within the meaning of
D.
Having determined that the Commissioner‘s audit decisions are subject to review under
The tax court found that Conga had no records and did not produce for audit any records for 2007. The parties also stipulated that for the tax periods between 2007 and 2010: (1) Conga did not record cash it received from cover charges in its POS system; (2) Conga did not deposit all revenues received from cover charges into its corporate bank account; (3) Conga‘s owner commingled his personal funds with corporate funds, and used the corporate bank account to pay personal expenses; and (4) Conga‘s 2008 bank statements showed that Conga had deposited at least $61,913.13 more than the gross receipts reported on its sales tax returns.
We conclude that the Commissioner‘s decision to use an indirect audit to assess taxes was supported by the record. The Commissioner presented evidence that the records Conga produced for audit were inadequate, incomplete, inaccurate, or unreliable. We recognize that Conga produced some records, but the taxpayer has the burden of producing adequate and complete records to support its tax returns. See
Finally, we examine whether the tax court‘s reversal of the Commissioner‘s assessment order is supported by the record. The tax court concluded even if the Commissioner‘s use of the indirect audit was proper that Conga overcame the prima facie validity of the Commissioner‘s assessment order, and therefore “the burden shift[ed] back to the Commissioner to produce evidence in support of [the] assessment.” Conga Corp., 2014 WL 1711795, at *25. The tax court reasoned that the Commissioner offered no additional evidence other than the assessment order and failed to satisfy her burden of proof, and therefore reversed the Commissioner‘s assessment order. Id. We disagree.
When a taxpayer presents substantial evidence that the Commissioner‘s assessment order is invalid or incorrect, the presumption of validity is overcome, and the case is “decided by the trier of fact the same as if the presumption had never existed.” See Anderson v. City of Minneapolis, 258 Minn. 221, 228, 103 N.W.2d 397, 402 (1960) (quoting Ogren v. City of Duluth, 219 Minn. 555, 563, 18 N.W.2d 535, 539 (1945)); accord Minn. R. Evid. 301 comm. cmt.-1977. The taxpayer, however, continues to bear the burden of proof in the proceeding. S. Minn. Beet, 737 N.W.2d at 558; F-D Oil Co., 560 N.W.2d at 707; Nw. Airlines, Inc. v. Comm‘r of Revenue, 265 N.W.2d 825, 829 (Minn. 1978). The taxpayer retains this burden of proof because the taxpayer is in the best position to produce the records and information relevant to the matter in dispute. F-D Oil Co., 560 N.W.2d at 707; see also Savig v. First Nat‘l Bank of Omaha, 781 N.W.2d 335, 347 (Minn. 2010) (“‘[A]ll else being equal, the burden is better placed on the party with easier access to relevant information.‘“) (quoting In re UnitedHealth Grp., Inc. S‘holder Derivative Litig., 754 N.W.2d 544, 561 (Minn. 2008)).
Once the presumption of validity is overcome, the tax court must examine the evidence presented by both parties and determine “the amount of taxes owed.” S. Minn. Beet, 737 N.W.2d at 559; McNeilus Truck & Mfg., Inc. v. Cty. of Dodge, 705 N.W.2d 410, 413 (Minn. 2005); Stronge & Lightner Co. v. Comm‘r of Taxation, 228 Minn. 182, 194, 36 N.W.2d 800, 807 (1949). Ultimately, the tax court may conclude that the taxpayer owes the amount of taxes assessed in the Commissioner‘s order, or owes the amount of taxes contended by the taxpayer, or owes some different amount of taxes. The determination of the amount of taxes owed requires independent support in the record. S. Minn. Beet, 737 N.W.2d at 559.
We agree with the tax court that Conga presented substantial evidence that, if believed, could overcome the Commissioner‘s presumptively valid assessment order. But we are unable to determine whether Conga in fact overcame that presumption for three reasons. First, the tax court‘s legal error regarding the standard of review for the Commissioner‘s decision to conduct an indirect audit inhibited a
Second, in determining that the Commissioner erred in conducting an indirect audit, the tax court improperly shifted the burden of proof to the Commissioner. By doing so the tax court failed to apply the presumption that all sales are taxable, and failed to enforce the taxpayer‘s burden to prove that any additional sales were not subject to tax,
Third, the tax court failed to independently weigh the evidence to determine if Conga owes additional taxes. Specifically, when the tax court is presented with conflicting evidence, it must independently review the records to determine the disputed issues and the basis for its conclusions. See S. Minn. Beet, 737 N.W.2d at 559. Here, the parties presented conflicting evidence regarding Conga‘s total sales and revenues, taxable income, and total taxes owed. The tax court erred by failing to assess the evidence presented in order to determine whether Conga‘s total sales, revenues, and taxable income imposed any additional tax liability.
III.
In sum, we conclude that
Additionally, the Commissioner has the authority to use an indirect audit to assess taxes when the taxpayer fails to produce adequate and complete books and records for audit, or the Commissioner determines that the taxpayer‘s books and records are not accurate or reliable. Moreover, an indirect audit is not a “statistical or other sampling technique[]” within the meaning of
Finally, the Commissioner‘s decision to use an indirect audit to assess taxes was supported by the record. But the tax court committed legal error by applying an incorrect standard of review, by shifting the burden of proof to the Commissioner, and by failing to independently weigh the evidence to determine whether Conga owes any additional taxes. We therefore conclude that a remand for further proceedings consistent with this opinion is necessary.
The tax court reversed the penalty assessment for tax years 2008-2010, but did not make any findings regarding the penalties assessed in the Commissioner‘s order. The standards for imposing penalties are set forth in
Reversed and remanded.
DIETZEN
Justice.